Eric, a Cash Basis Taxpayer, Owned 25% of Watson, Inc

Eric, a cash basis taxpayer, owned 25% of Watson, Inc. stock. Watson, Inc. files a calendar year U.S. Corporate Income Tax Return Form 1120 employing the accrual method of accounting. Eric loaned Watson, Inc. $100,000 at the beginning of 2003. The accrued interest on this loan was $5,000 as of December 31, 2003. Watson,Inc.paid Eric the $5,000 in January of 2004. How should Eric report the interest income and Watson, Inc. report the interest expense from this transaction?

A) Watson, Inc. reports the expense in 2003 and Eric reports the income in 2003
B) Watson, Inc. reports the expense in 2003 and Eric reports the income in 2004
C) Watson, Inc. reports the expense in 2004 and Eric reports the income in 2004
D) None of the above